1120C to Partnership?

[ILLMAS]

Hello, a new client of mine recently incorporated (1120C), and now 2 other individual want to join him as partners. They really don't want to dissolve the corporation, because they want to keep the same name and/or re-apply for a city license again. From what I know each wants to own 33.33% of the business, however I am trying to figure out if a legal document can be created to include the other 2 partners as owners of the 1120C. This is where I see a major problem, they are not going to have payroll, each partner will manage the shop on different days, so no need for employees, however they want to distribute the profit at the end of the month to each partner, I mention to them it was not possible under a corporation just to take out money. If they change the status from a 1120C to 1120S, instead of a partnership, would the work better?

Thanks

[Lion EA]

The legal document is a stock certificate. Will the corporation issue or sell stock to the new shareholders? Or, does the existing shareholder own 100% of the stock, so he'll sell to the new shareholders? Shareholders who perform services for the corporation should be on payroll, S or C corporation.

[TAXBILLY]

unless you are a lawyer I would refer them to one.

taxbilly

[Lion EA]

I may have misunderstood the question. Is your client wanting to dissolve his corporation and then form a partnership with two other people? He'd distribute the corp assets at FMV. Check the secretary of state web site for dissolution procedures. He should consult a lawyer for organizational paperwork for a partnership, especially an operating agreement covering things like how to dissolve or procedures if one partner wants to withdraw or retire. As long as he's going to use a lawyer anyway, he should discuss the dissolution of the corporation as well as the formation of the partnership. Partners take guaranteed payments for services to the partnership. Remaining profits are divided per the partnership agreement on the K-1s. That operating agreement will be very important.

[kcjenkins]

Since you did not put your location into your profile, I don't know where you are located. But it depends on when the corp was started as to whether it's too late to elect 1120 S status, which is probably how they should go. Given the new easy 'late election' rules, it may be possible.

Either they could form a partnership with the corp as a partner, or they could buy into the corp, but either way, if they are a corp or an S corp, they need to do payroll for anyone who works in the business.

I'd suggest that they should talk this situation over with an attorney, because there are a lot of issues besides tax ones involved here. Acting first and getting professional advice second is going to cost them all trouble, that much is sure.

[ILLMAS]

_{unless you are a lawyer I would refer them to one.}

_taxbilly

No, I am not but I have mention to them it's best if an attorney creates the partnership and puts something in writing.

_{I may have misunderstood the question. Is your client wanting to dissolve his corporation and then form a partnership with two other people?}

Yes, that correct.

_{He'd distribute the corp assets at FMV. Check the secretary of state web site for dissolution procedures.}

Since it's a fairy new corp, it has no assets at this moment

_{He should consult a lawyer for organizational paperwork for a partnership, especially an operating agreement covering things like how to dissolve or procedures if one partner wants to withdraw or retire. As long as he's going to use a lawyer anyway, he should discuss the dissolution of the corporation as well as the formation of the partnership. Partners take guaranteed payments for services to the partnership. Remaining profits are divided per the partnership agreement on the K-1s. That operating agreement will be very important.}

I agree 100%, however it seems they rather do the legal documents themselve. I told them I would not get involved with any paper work, the best I could do is disolve the corp.

_{Since you did not put your location into your profile, I don't know where you are located. But it depends on when the corp was started as to whether it's too late to elect 1120 S status, which is probably how they should go. Given the new easy 'late election' rules, it may be possible.}

The corp is Illinois, the corp was formed in June 2008, I did mention to them it's an option elect to become a 1120S vs creating a partnership, but would still require for an attorney to put something together for them.

_{Either they could form a partnership with the corp as a partner, or they could buy into the corp, but either way, if they are a corp or an S corp, they need to do payroll for anyone who works in the business.}

That's another option I see "partnership with the corp as a partner", I will definetly let them know, as for the payroll that's another story, I don't know in what way for them to understand they cannot just take money from the business.

Thanks everyone

[kcjenkins]

Well, if they deep-six the corp, and just form a simple partnership, then they would not need to do payroll, they can take draws, because partnerships distribute all income and losses to the partners through the K-1. But please emphasize to them that they must keep GOOD RECORDS in order for you to determine both the income and the allocations between partners. And STRONGLY encourage them to at a minimum do a WRITTEN partnership agreement, and consider GPP. This is especially important where they all work in the business, as putting it in writing can cause them to face up to issues of who gets what, and does what, and how profits are distributed. It's disagreements after the fact that break up most of these types of businesses within a year or two, where there is no written partnership agreement.